Fiscal Decentralization, Political Heterogeneity and Welfare
Erkmen Giray Aslim and
Prague Economic Papers, 2022, vol. 2022, issue 5, 347-376
This paper contributes to the literature on fiscal decentralization by presenting a formal model of the interaction between the central and local governments (CG and LGs, respectively) where LGs may diﬀer in their degree of political alignment with CG. The non-cooperative optimal behaviour of the agents reveals that optimal tax increases with the extent of fiscal decentralization (FD), political unison and spillovers across localities, while LGs' optimal tax collection eﬀort is negatively associated with all of these parameters. The first novel finding of our study is that both welfare peaks and income distribution are more equitable at a lower level of FD in the case of spillovers than in the case of no spillovers, which supports the decentralization theorem. The second novel finding is that both the amount of redistributable income and central government utility increase with the degree of political unison.
Keywords: Fiscal decentralization; fiscal eﬃ; ciency; welfare (search for similar items in EconPapers)
JEL-codes: H71 H72 (search for similar items in EconPapers)
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